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Lecture 3

Week 3

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1 AYB240 – SUPERANNUATION REGULATION AND PRACTICE LECTURE 3: SELF MANAGED SUPERANNUATION FUNDS What is a SMSF?  Managed by fewer than five (5) members o I.e. Maximum of 4 members o Can be a single member fund  Elect to be administered by the ATO SMSF Requirements  Governed by o Individual trustees, OR o A corporate trustee  Each member is a trustee or director of corporate trustee  Each trustee is a member o Exception: single member SMSF  Trustees are individually and jointly responsible for management and administration of the fund  No member is an ‘employee’ of another member o Exception: ‘relatives’ (SIS Act s17a(1)(e))  Direct blood and marriage connections  Spouse includes defacto and former spouses  No member receives remuneration for his/her services  Legal personal representative can be trustee if hold valid Enduring Power of Attorney o All members must be > 18 Factors contributing to the growth of SMSF  Spurt in total assets between 2006 and 2007 o Between May 2006 - June 2007 permitted to contribute up to $1m in tax concessional contributions  Choice of fund for employees introduced in 2005  Global financial crisis  Ageing population o 80% of SMSF members >45 years old Why use an SMSF?  Control  Self employed  Flexibility in investments  High net worth individuals o Commercial property  Flexible payment options o Acquisition of listed shares  Concessions  Tax effective  Small business operators Costs of running an SMSF  Set up costs between $700 and $1500  Yearly fees can be between $1700 and $3500+ o Very large funds can easily exceed $10,000 in fees if have broad range of investments  Additional costs if in pension paying phase  Audits start at $450 o Assuming no breaches  Variations on all costs incurred depend on the size of the fund and the investment choices made Other Costs  Requires time, knowledge and skills o Significant time requirements 2 o No formal qualifications – it is assumed that the trustees understand and apply the legislation  Regulatory and compliance obligations o Extra scrutiny by ATO  Penalties o Tax implications o Implications for trustees Why NOT use SMSF?  Small amount of assets o Fixed admin and other fees translate into large proportion of assets o ASIC suggest < $200k not cost-effective  Approx 25% have assets < $250k  Trustees have no investment capability or not prepared to learn and carry out their duties and obligations  Invest solely in managed funds o ie someone else is making all investment decisions  Not suited to those who cannot understand is “not money for their own use!” (Sole Purpose Test) Establishing an SMSF  Become ‘regulated superannuation fund’ o Lodge notice with ATO declaring fund will comply with SIS Act o Notice of Compliance issued by ATO after lodgment of first tax and regulatory returns  Residency requirement o Established in Australia o Central management and control of the fund is “ordinarily in Australia” o Accumulated entitlements of resident active members >50% of total entitlements of active members Compliance Status  Must meet the Sole Purpose Test and comply with regulation at all times  Contraventions can result in Tax Commissioner revoking Notice of Compliance o Lose concessional tax treatment (15% becomes 45%)  No culpability test for SMSF o Extent on balance that some or all members directly/indirectly party to contravention Trust Deed and Governing Rules  Trust deed sets out governing rules of fund, including o Declaration of trust o Individual trustees  Sole or primary purpose is to pay age pensions o Trustee powers, appointment and removal o Membership eligibility o General design  investments, contributions, rollovers from other funds, death, insurance, expenses, taxation, record keeping, reserves, pension payment o Other Trustee Requirements and Observations  Corporate Trustee or Individual Trustees?  Trustees o Give written consent to being appointed o Make written declaration that they understand their obligations and responsibilities  Prohibition of remuneration of trustees o Certain exceptions  Trustees’ duties and Obligations 3 o Extensive Investment Rules and Restrictions  Where the SOLE PURPOSE TEST ALWAYS PREVAILS  Formulate and give effect to an appropriate investment strategy (SIS Act s52(2))  Restrictions – you must be able to demonstrate appropriateness to the fund type o Arm’s length investments  Eg if selling shares or property it must be at market price o Acquiring assets from members  Prohibited  However, there are some exceptions eg shares and property if at arm’s length o In-house assets  Exception: real business property  Maximum investment =5%  The Cooper Review proposed that this be prohibited – Government has not taken this on board as it would be unfair to SMSF compared to larger funds. o Loans to members o Borrowing  Borrowing to fund investments/purchases is not allowed by ALL super funds (no –‘ve gearing)  Exception: instalment warrants o Exotic investments  Eg artwork, where the artwork sits in a fund member’s living room Record Keeping and Accounts (SIS Act S35-36)  Keep minutes and accounting records o Accounts – retain 5 years o Minutes – 10 years  Prepare financial statements o Statement of financial Position o Operating Statement  Have accounts and statements audited  Lodge annual returns with ATO Tax Administration and Annual Returns  Combined annual return to ATO o Income tax return o Regulatory return o Membe
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